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firizona s t a t e pegielature
I I
LEO CORBET PRESIDENT OF T H E SENATE
FRANK KELLEY SPEAKER OF THE HOUSE
A SUMMARY OF THE RESEARCH AND FINDINGS OF THE ARIZONA LEGISLATURE'S SPECIAL SESSION ON SCHOOL FINANCE AND TAXATION
F i n a l R e p o r t S u b m i t t e d i n F u l f i 1l m e n t o f a NCSL-NIE GRANT SCHOOL FINANCE RESEARCH COST-SHARING AWARD
p r e p a r e d by t h e s t a f f o f t h e ARIZONA STATE SENATE, HOUSE OF REPRESENTATIVES and J O I N T SELECT COMMITTEE ON TAX REFORM AND EDUCATION FINANCE
u n d e r t h e d i r e c t i o n o f the P r e s i d e n t o f the S e n a t e , Leo C o r b e t a n d t h e S p e a k e r o f t h e House, F r a n k K e l l e y July, 1 9 8 0
CONTENTS I. 11. PREFACE.. INTRODUCTION
............................
i
A.
The Need f o r Reforms
1. 2. 3.
B. The
1. 2.
111.
..................... Government S p e n d i n g . . . . . . . . . . . . . . . . . . . T a x a t i o n Reform . . . . . . . . . . . . . . . . . . . . . E d u c a t i o n Finance Reforms . . . . . . . . . . . . . . . . S p e c i a l S e s s i o n on Tax Reform and School Finance . . . . . Background . . . . . . . . . . . . . . . . . . . . . . . Researchoutline . . . . . . . . . . . . . . . . . . . .
RESEARCH EFFORT
A.
A n a l y s i s of Major Tax I s s u e s
1. 2.
................. I n t r o d u c t i o n - C r i t e r i a f o r E v a l u a t i n g Tax A l t e r n a t i v e s . PropertyTaxIssues. . . . . . . . . . . . . . . . . . .
a.
b.
c. d.
H i s t o r i c Development of t h e Arizona P r o p e r t y Tax B u r d e n . D e s c r i p t i o n of t h e C u r r e n t P r o p e r t y r ax' System D e s c r i p t i o n of P r o p e r t y Tax Models Data A n a l y s i s on P r o p e r t y Tax V a l u a t i o n s and P r o p e r t y Tax Burden
i.
.................... ... ......... ................
The Arizona s c h o o l f i n a n c e simulator Summary of computer r u n s performed
Appendix 1: Appendix 2:
ii.
............ ............
a.
D e s c r i p t i o n of E x i s t i n g Income Tax System
i.
.....
Appendix 1: Appendix 2: Appendix 3 :
ii.
iii.
Adjustmnts t o federal adjusted income t o a r r i v e a t Arizona a d j u s t e d g r o s s income I t e m i z e d d e d u c t i o n s , exemptions and a d j u s t m e n t s Income t a x c r e d i t s
...... ......... ........
4.
. . . . . . . . . . . . . . . . . . . . . . . . 85 i. Appendix 1: F i l e d e s c r i p t i o n . . . . . . . . . 87 ii. Appendix 2 : P o p u l a t i o n weight t a b l e . . . . . 93 iii. Appendix 3 : Program sample . . . . . . . . . . 94 i v . Appendix 4 : F i l e index . . . . . . . . . . . . 115 v. Appendix 5: S i m u l a t i o n r e s u l t s . . . . . . . . 116 S a l e s and Use Taxes . . . . . . . . . . . . . . . . . . .132 a. D e s c r i p t i o n of E x i s t i n g S a l e s Tax System . . . . . . 132 b. T h e F o o d S a l e s T a x I s s u e . . . . . . . . . . . . . .147 i. Background . . . ; . . . . . . . . . . . . . . 147 ii. .Data and s i m u l a t i o n t e c h n i q u e s . . . . . . . .147 iii. F i n a l r e p o r t - The S a l e s Tax on Food: Options f o r Reducing t h e Tax Burden . . . . . . . . . . I 6 5
a.
b.
C o l l e c t i o n and u s e of t h e I n d i v i d u a l Income Tax File
Appendix 1: Appendix 2:
b.
Methodology Impacts Methodology Impacts
. . . . . . . . . . .202 - Equity . . . . . . . . . . .214
-
Revenue
B.
C.
. . . . . . . . . . . . . . . . . . . . . . . . .223 1. Background . . . . . . . . . . . . . . . . . . . . . . .223 2. Framework f o r a n E x p e n d i t u r e L i m i t a t i o n . . . . . . . . 224 3. Elements of a D a t a B a s e . . . . . . . . . . . . . . . .240 4. A n a l y s i s o f t h e I s s u e s . . . . . . . . . . . . . . . . .246 A n a l y s i s of Education Finance I s s u e s . . . . . . . . . . . . .246
'
A n a l y s i s of I s s u e s R e l a t i n g t o Spending L i m i t s f o r Local Government s
1.
IV.
Appendix 1:
E d u c a t i o n a l Finance Assumptions
. . . . . .2 54
SUMMfSRY OF RESULTS OF THE SPECIAL SESSION
A.
B.
C. D.
Introduction E x p l a n a t i o n of P r o p e r t y Tax Reforms E x p l a n a t i o n of Food S a l e s Tax Repeal Conclusion and Summary of t h e Ten B a l l o t P r o p o s i t i o n s
V.
POSTSCRIPT
257 . . . . . . . . . . . . . . . . . . . . . . . . ' 258 . . . . . . . . . . . . 273 ............. . . . .274 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
'
PREFACE
At the time when the Arizona Legislature was preparing for its recent Special Session on Tax Reform and Education Finance, the National Conference of State Legislatures issued a memorandum offering cost-sharing grants to applicants who were interested in conducting research in the areas of school finance and property tax reform. The Arizona Legislature applied to NCSL for a cost-sharing grant and received an award of $33,800 in May of 1978. The award was to help finance the development of computer models which were to be used to simulate the impacts of tax reform proposals developed prior to and during the Special Session. This document is submitted in fulfillment of the grant requirements outlined in the original agreement between NCSL and the Arizona Legislature. The document contains background information on the factors that led to the Special Session, outlines the research efforts undertaken in preparation for the Session, and describes the reforms that are the end product of the Session and were ratified by the voters on June 3, 1980. exercise in the future. It is hoped that this document will serve as a useful source of information for other states preparing to engage in a similar
INTRODUCTION A. THE NEED FOR REFORMS In early 1978, the Arizona Legislature began making plans to undertake a wide-ranging reform of the state's taxation and education finance systems. A special Legislative session was scheduled for the fall of 1979 to deal exclusively with the following issues: 1.
2.
Local government spending limits. Taxation reforms (primarily property tax reforms). Education finance reforms.
3.
The need for extensive changes in these areas was precipitated by a series of social and economic events that impacted heavily on Arizona's existing systems of taxation and education finance. following sections. The impact of these events is discussed in the
GOVERNMENT SPENDING
Perhaps the single largest economic concern of the 1970's was inflation. During the period 1975-1979, the Phoenix metropolitan consumer price index As goods and services became increased at an average annual rate of 9.3%.
increasingly expensive to consumers relative to nominal income, public attention
-
inevitably focused on ways to reduce marginal expenditures in order to maintain real income levels. Taxes and government spending were obvious targets. Unfortunately,inflation also affects government, increasing the cost of government purchases that go into the goods and services provided to the public. The effect is an overall increase in the level of government spending. In addition, a state like Arizona, with a rapidly expanding population, must provide services to more and more people. This increase in population also translates into increased levels of government spending. In view of these increases in demand and in the cost of government services, Arizona governments have generally been reluctant to voluntarily curb their expenditures. Between N 1970 and 1978, the state's General Fund operating budget increased at an annual rate of 14.6%. The General Fund budget grew from 4.7% of total state personal income in FY 1970 to 5.1% in FY 1978. Similarly, total county expenditures grew by 17% on an annual basis between 1970 and 1978. School district expenditures increased at an annual rate of 9.8% between FY 1975 and FY 1979.
In response
to
the
rapid
growth
of
state spending, Arizona voters Proposition 101
overwhelmingly approved Proposition 101 in November of 1978.
amended the State Constitution to limit the expenditures of the state government (General Fund and Nan-General Fund) to 7% of total state personal income.L1 A copy of the limitation appears on page 7. While Proposition 101 addressed the spending ~olicies of the state, it did nothing to limit the fiscal activities of local governments. controls were Although existing laws imposed limited budget controls on county and city governments,y these largely regarded as ineffective due to the large number of expenditures excluded from the limits. Thus, the development of adequate spending limits for local governments became a primary objective of the Special Session. TAXATION REFORM Although reforms to the state's sales tax and income tax systems were considered during the Special Session, the demand for tax reform initially centered on the state's property tax system. One reason for the focus on property taxes is the relatively heavy dependence on property tax revenues by Arizona's local governments. The property tax accounted for 66% of total local government's own source revenues in 1977. Thus, rapid increases in local government expenditures result in related increases in the amount of property taxes that must be collected to support local governments. In addition, Arizona taxpayers have a long history of disenchantment with the property tax. This disenchantment can be attributed to several factors. Foremost among these factors is the impact of inflation on the tax liability of property owners. In Arizona, the current market value of real property and improvements is the basis for levying property taxes. While the general price index rose by 43.4% between 1975 and 1979, home values increased on the order of 110%. Although rising property valuations will not result in increased tax bills if the tax rate is comensurately reduced, local governments have traditionally demonstrated a general reluctance to significantly reduce tax rates.
11 -
Appropriations subject to the 7% limitation during FY 1979-80, the fiscal year of implementation, totaled $1.44 billion, or 6.99% of total state personal income.
21 -
Fiscal controls on county and city governments in Arizona have been in effect since 1934.
Compounding this problem is the recent change in the demographic composition of the state. With an expanding number of individuals retiring in Arizona, an increasing portion of the state's population is living on fixed incomes. With inflation increasing the value of property that is subject to taxation, the tax burden soon becomes unaffordable to these individuals. In addition, many of the services demanded communities. by these individuals are provided by local retirement Consequently, these individuals do not rely heavily on public
services that are funded with property tax revenues (i.e. primary and secondary education). As a result, the property tax is not popular among this section of the population. Another problem that is associated with Arizona's property tax is the tax's built-in tendency toward inequitable treatment of individual taxpayers. Because the property tax is based on the appraised value of properties, differences in the level of appraisal can result in unequal tax burdens for similar properties. Recent studies prepared by the Legislature indicate that wide disparities in 11 appraised values exist throughout the state- . The disparities are caused, in part, by the variety of appraisal techniques employed throughout the state and the inherent difficulty in accurately estimating the market value of all properties on an annual basis. A final factor that contributed to the dissatisfaction with the property tax system in Arizona, is the use of a classified property tax system. Prior to the Special Session, the Arizona property tax system classified property into nine separate categories. Each of these categories is shown below with its corresponding assessment rate.
11 -
Internal Association of Assessing Officers, Analysis of Valuations Uniformity and Evaluation of Mass Appraisal Techniques in the State of Arizona, February
1978; and,
Price Waterhouse and Co., Findings and Recommendations from the Management Audit: Arizona Department of Revenue, Property and Special Tax Division.
Assessment Class Property Type Flight property; private car company property; producing mines and timber Railroads Telephone and telegraph company property; gas, water and electric company property; pipeline company property General Commercial and industrial property Agricultural property and vacant land Residential property; non-profit handicapped or elderly care facilities Rental residential property Historic property Producing oil and gas company property In Arizona, the assessment rate determines the portion of property value that is subject to taxation for properties within the class. "discriminates" against properties. Because the assessment rate is higher for commercial and industrial properties, the property tax these types of properties in favor of residential The assessment rate also varies among classes of industrial and Rate
commercial properties. This means that a larger relative tax burden is borne by selected types of industries relative to other types of commercial and industrial properties. Owners of commercial and industrial properties have long opposed the classified tax system on the basis that the additional taxes are passed forward to final consumers and simply result in hidden taxation. In recent years the Legislature has attempted to make the property tax more palatable to taxpayers by enacting a number of relief measures that are designed to offset escalating property values. These measures, which reduce the impact of inflation on property tax assessments, include: inflation indzxing of property values, a truth-in-taxation law, and a sizeable property tax reduction program for 1 homeowners- / .
1/ -
In fact, Arizona homeowner tax bills have remained remarkably stable during the 1970's due to tax reductions authorized by the Legislature.
Unfortunately, these relief programs are generally viewed by the public as temporary solutions to a problem in need of a more long-term solution. The failure of these relief measures to elicit significant support from taxpayers prompted the Legislature to give top priority to major property tax reforms during the course of the Special Session. EDUCATION FINANCE REFORMS The education finance system in the state of Arizona is closely linked with the property tax system. The local property tax is a major revenue source for Increases in the cost of education have This increased reliance on local school districts and community colleges. property finance
placed increased demands on the property tax.
tax revenues has limited the ability of the Legislature to make
modifications to the property tax system without severely impacting education
.
In order to limit school districts' reliance on local property tax revenues, the Legislature, in 1974, passed a package of reforms to the education finance system. The package provided an increased level of state support for education and established limits on the growth of expenditures in the general education budget. -This school finance plan only partially solved the problem of property tax reform, however. Although the limitations on budgeted expenditures applied to all districts, districts with above-average per pupil expenditures were required to finance their expenditures in excess of the average with local property tax revenues. As a result, the property tax burden borne by these districts increased relative to other districts. In addition, spending in unrestricted areas of the budget, such as
transportation, budgeted capital outlay, special education (later limited), and override allowances, was financed primarily or entirely with local property tax revenues. Expenditures in these areas increased tremendously during the last half of the 1970's. For example, transportation expenditures in the state alone grew by approximately 17.7% per year from 1974-75 to 1978-79. Budget override amounts were unlimited and, once approved, were included in the district budgets and tax rates for all subsequent years. Because of the increases in all of these areas, local property tax levies continued to grow at uncontrolled rates and created unequal property tax burdens throughout the state.
Community college districts in Arizona also experienced significant growth during the 19701s, both in student population and operational expenditures. Expenditures increased by approximately 12% per year from 1973-74 to 1977-78. The revenue from local property taxes levied in support of community colleges grew by approximately 17% per year during the same period. Unlike school districts, the community college districts had no state imposed budget or expenditure limitations.
In order to meet school district and community college expenditure needs while reforming the property tax system, it was necessary to consider a shift away from the local property tax in financing education. For this reason, education finance reform also became a major issue in the 1979 Special Session.
APPENDIX 1 STATE SPENDING LIrlITATION
Art. 9,s
16
CONSTITUTION
Proposed by 1.nn.a 1966. I1.C.R. No. 10. tiled Aoril 22. 1966. Law Revlew Commentaries J'rop~rty t n x clna~lflrn(lonr. conalltu110nnIIty. 1 3 r \ r l ~ . L P ~ iWv. 5:s
(1911).
1 17. Economic estlrnatet commlsslon; approprlatlon Ilrnltatlon; powors and
dulles of comnllsslon Section 17. T h c ccor~orriiccstinlntcs col~~nrlssion s1111llI r c~tnhllslietlby Inw, with n mcl~lbcrsl~ip not to csrrrtl tl~r: I I I ( . I I I ~ ~ nr~tlsl1:11I e l c t c r r n i ~ ~ r of ~. nnd pui~llsliprior to Fcbril:try I of c : ~ r iycnr tllc cstinlntc.tl tot111n c r r o ~ r ~ ~ l ~ IllcolnC f o r the Sollowing fisr:rl ycnr. 1 %April 1 o f pitcfr ycilr tllc coo4111issin11 ~ sllnll . dctcr~liirrcnncl lrrrblisl~ n f i ~ l n l rvtinlate of tllc totrti ~rcrsou:~lI I C O I I I for the ~ ~ follo~ving fisc111y e r r , \VIIICII C S ~ I I I I : I ~ C ~11:iIl I I S C ~iri r o r ~ ~ p ~ ~ t i r ~ g be tlrc nl>~~rc)printions limlt for thc 1cgisl:tturc. For the pl~qroscs l this scctlor~."totnl l~crsorlnl o ' illco~nc" nlcnns tlic dollnr nnlount that \\.ill bc re;)ortccl 81% t o t ~ t lirlror~leby persons for tllc stntc of Arizon:l by the L. S. d c p n r t l n r t ~ t cumlrlcrcc or Its ' of successor ngcncr. For purposes or this section. "stntc t t ~ s rcvcnues" sllnll be .defined by Invi. T h c lcgislsture shnll not, by npproprtntion f o r nny fiscnl gcnr. cnrlsc t h e Cxpenclltllrc of s t a t e t n s rcvcllrlcs for tllnt fisc:11 y c : ~ rto esccecl scvcri per ccnZ ' of the total pcrsonal incon~cof t l ~ c t ~ i t c suci: fiscal ycnr ns dctcrr~~irrctl s for by t h e cconon~lc estinli~tcs commissioli, cuccpt rlpon nffirrr~:ltivc vote oil c:icl~S I I C ~ I appr0pri:il ion of two-tlrirtls of tllc r ~ ~ c n r k r b i t of c ~ ~ cilollrc of the 1cgisl;lture. ip li In ordcr t o pcrnilt tllc t r a n s f c r c ~ ~ c c ~ w r e r n ~ ~ ~ rfllnctiorlr bt\vcc3c~ h e of ntnl t fw1cr:ll nrttl stntc gorer~l~nctrts I)ct\rcc~ltllc s t a t c ~ n v c r n t a c o t:111tl its ponntl ' flticnl ~ a b d i ~ i s i o \ritliout.al~ritl~i11:: r~s tile p~irposc this ucctiot~to litnit stntC of spct~dlngto n percciit:lgc of tot:11 pcrsnn:~l ititnn!~, thc I r g i s i : ~ t l ~ r~11:1i1 proc Vldc for n d J ~ ~ s t r n c ~ i t stlre c c o n o ~ l ~cstilll;ttc.i C O I I I I I I I ~ S ~ ~of t l r ~ I)? ic II :~pl)rnpri:iti0n perccntngc fi~iiitnfton totnl llcrsonnl illconle consistcat \\-itit t h e folio\\'of Ing principles: 1. If. by ordcr of nny collrt or by Icgislnti\-c cnnc-ttrrcnt. the costs of n PrOprntll nre tnirrbfcrvrti fro111 11 pc~litic:~l ~ ~ l r c l i r i s i ~this st:tte to tlrc st:~te, ~ of r l , h e approprintion pcrrcatngc lifl~it:ltior~ I I : I ~ 11v C O I I I I I I C ~ I S I I ~ Irrcrc:rscd t I :~~~~~ Provided tlrc t n s rcvcrrtrcs of tlrc nffcctcit po1itlc:il s u b t l i v l s i o ~ ~n r e coms mcllsumtcly tlccrcnscd. 2. If. by order of any collrt o r by 1c~isl:ttirccn:~cttuct~t. costs of n protllc . Erfinl Ore tr:itlsfcrrctf frorli t11c s t : ~ t cto :I ~~tditic:rl sc~lttlivi:;io~~ this st:ttc, of ,the nl)froprtntio~~ otlrwntago I i ~ ~ r i t r ~ t lul~:~,Il cor>rr~~c~~u~crntc-l>. on IIC clr*crt~:tsctl. and t l ~ ctiis rntcs of the ~ ~ o l i t i a slrl~di\*isionnl:iy k c o n r ~ n c ~ ~ s ~ ~ r In-c' l y tl nl crc:1sCl1. 3. I f fctlrrnl tnscs n w rctl~fcrtlon co~~tlitinli tli~rt~ I I C st:ttr I t ~ c r e : ~ s c CS~ l t ( l i t l l by ~ I I I I I ~ I I I I~ t l e ~ i v ~ o l ~ i ~~ + t l ~ r :t ~ lt l ~ ~ ~ t i o ~ i , r ~ 1111 ~ t ~ t11c f t r~ ~c :i{)i~roprintl011 jwrcvrtnx~* Iir~~it:~tiort I I ~ I I I ( - ~ I ~ : I ~lry I~1tc11I I I O I I I I ~ . III IT ~I II . 4. I f tllc c o w of 11 ~rro:rnn~ nre tr:tr~sfvrvt~tl fror~rtile s t n t c to tllc -fctlcrl~l Aovcrnnrcnt. thc :tpprol~riirrlni~ l)crrcul:lgc lil~~ir:ttitr~i sl1:11I bc c o ~ ~ r r i ~ r ~ ~ s u r n t c l y dccrcnscd. - 5 , TItc n d f ~ t ~ t t ~ ~ ~ * ~ i t prnvltlr~lfor 111 tlllri sc.rtloll sllnll IH? nlc~tlc111 tlrc flrst fisc~ilycrtr of t r r ~ r ~ s f iov n~)c.rlttio~~. r SIITIIa c l J t ~ r t ~ ~s11:tll~ R t I I I ~ I ~I11~ 01~c~ rI f ~ for cnch s t ~ l ) - . ( ~ ( ~ ~ IrStC ~I~)'PIIT. AildVd. ~ ' l f f t i o ~ ~ 17, 197s; ~ ) ~ O C ~ I I I I I I ~ t ~ 'I I t SOV. tlon dritc--.\'ov. ':!I, 1DiB . .. .� .
.
-
:
'9
.
... .
..
(Enacted by a vote of the people of Arizona on Nov. 17, 1978)
B.
THE SPECIAL SESSION ON TAX REFORM AND EDUCATION FINANCE 1. BACKGROUND In order to address the many complex issues of tax reform and education finance, legislative leaders outlined the basis for a special legislative session to deal with these issues. The special session was scheduled for the fall of 1979. In February 1978, the Legislative Council Committee established the Joint Select Committee on Tax Reform and School Finance. Members were appointed by the Speaker of the House and the President of the Senate, and a staff was assigned to the Committee. The staff was comprised of existing House and Senate research staff members, as well as individuals drawn from other state agencies and new personnel hired expressly for the project. The charge of the Joint Select Commitee ( J . S . C . ) and its staff was to assemble data and background information for use in the study of tax and education finance reform and to prepare reform alternatives.
2.
RESEARCH OUTLINE Following organization of the JSC, a research program was designed. The research program emphasized the collection of detailed taxation and education data and the construction of computer models for use in analyzing legislative alternatives. The specific models required to complete the project were determined based on the reform objectives outlined by the Committee. A list of the Committee's objectives and the corresponding data and information requirements is shown on page 10. In general, the following models formed the basis of the analysis: 1. Property tax models
2. The individual income tax model
3. The sales tax model 4. The tax burden model 5. The education budget simulation model 6. City and County expenditure models
The development and use of these models is described in detail in the Research Effort Section of this report. In order to develop all of the necessary data and complete the analysis of reform alternatives in time for the Special Session, the Joint Select Committee staff constructed a timetable for the completion of research projects. The research schedule outlined for the education finance project group is shown in Exhibit I on page 11. The research schedule outlined for the tax reform project group is shown in Exhibit I1 on page 12. It should be noted that these research schedules were highly optimistic and the research program actually extended from January 1979 to early 1980.
Joint Select Committee on Tax Reform and School Finance Objectives
-
Data and Information Requirements
A.
General Considerations in Constructing a Taxation System: The Principles of Taxation 1. Relate taxes to ability to pay 2. Relate taxes to benefits received 3. Provide equity and fairness (vertical and horizontal equity) 4. Maximize total revenues 5. Simplify administration 6. Encourage economic development 7. Provide social equity 8. Maximize tax exportation
-
Review public finance literature and develop concept paper which defines and describes the principles of taxation and provides an analysis of various types of taxes as they relate to the principles. Historical profile of state and local revenues. Reliance comparison: state and local taxes
-
B. Specific Goals and Considerations
1. Property Taxation a. Reduce reliance on property taxes at state and local level and stabilize the problem b. alter the property classification system c. lower property taxes on homeowners d, improve horizontal equity e. institute measures to make the system more related to ability to Pay
2. Other Areas of Taxation a. develop replacement revenues to compensate for shift away from property taxes. The principles of taxation should be used as governing criteria b. modification to the income tax system c. modification to the sales tax system d. modification of user charges
Construct computerized data abstracts and impact models Legal Class Abstract Use Code Abstract Class 5 Abstract
-
Prepare income tax system tests Prepare corporate income tax system tests Construct tax burden model Construct sales tax data base prepare sales tax tests and
Prepare list of state and local user charges; source of authorization; analyze levels Education Finance a. provide equal education opportunities for all students b. maintain local administrative control of school districts c. stabilize costs of education d. equalize tax burdens for educa- tional costs among districts e. expand equalization program to other or all areas of school district financing f. consolidation of school district boundaries for funding
-
DOE equalization project data Prepare update of DOE equalization project Obtainlprepare school district budget abstracts Prepare inventory of school buildings
-
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RESEARCH EFFORT 1. INTRODUCTION
-
CRITERIA FOR EVALUATING TAX ALTERNATIVES
The stated objective of tax reform is to produce a tax structure that is an improvement over the current system. In order to achieve this objective, it is Because these criteria important to establish criteria that can be used to evaluate both the current tax structure and any new alternatives under consideration. serve as a basis for determining whether a given tax will better meet the demands of the taxpayer, it is important to identify exactly what it is that the taxpayer expects from a tax and incorporate these demands into the criteria. 1)
2)
Basically,
these demands can be narrowed to the four major objectives outlined below: Revenue Generation Social Equity
-
The revenues produced by the tax should be
sufficient to pay for the services demanded by the taxpayer.
-
The tax should be fair and should not become too great a
burden to the individual taxpayer.
3)
Ease of Administration
-
The tax to be paid by the individual taxpayer
should be easy to determine.
4)
Consistency with State Goals within the state.
-
To the greatest extent possible, taxes
should be exported and should promote a rational pattern of development Taking each of these in turn, it is helpful to identify the characteristics which a tax must possess in order to meet the objectives outlined above.
.
Revenue Generation In the case of revenue generation, a tax must satisfy two characteristics in order to consistently produce enough revenues to pay for the service demanded by the taxpayer. First, the revenues produced by the tax must expand as the demand for services increases. A good illustration of a tax which possesses this characteristic is the local property tax. Ordinarily, property taxes are levied at the local level for the purpose of financing school expenditures. New families with school age However, the children that move into the district will raise the total level of school expenditures, thereby increasing the need for additional revenues. in-migrant families frequently require new housing, thereby adding property value to the tax base and generating additional revenues. The individual income tax, on the other hand, does not possess this characteristic. to follow different cycles. With the income tax, increases in the demand for government services and increases in the tax base tend During a recession, for example, the level of unemployment will increase and the number of individuals demanding income assistance is likely to expand. At the same time, however, the level of taxable
income may be falling and the amount of revenues produced by the income tax declining.
A second characteristic a tax must possess in order to continually produce
enough revenues to pay for the services demanded by the taxpayer is that the revenues must increase as the price of the service demanded increases, The sales tax is a good example of a tax which possesses this characteristic. Because a sales tax is levied on the gross receipts from the sale of goods, a general increase in the price of goods will generally result in an increase in the revenues produced by the sales tax. This increase in revenues can then be used to pay for the higher cost of providing government services, which is also associated with a general increase in the price of goods. A good example of a tax that does not possess this characteristic is the fuel tax. Currently, the Arizona fuel tax is collected based on the number of gallons of gasoline purchased, not on the gross receipts from the sale of gasoline. Therefore, a general increase in the price of goods (including gasoline), which will increase the cost of government services, will not necessarily result in an increase in revenues from the fuel tax. Social Equity In the case of social equity, three characteristics must be present if taxes are to be fair and are not to become too great a burden to the individual taxpayer. First, the tax burden borne by the individual taxpayer should be affordable from current cash flow without undue hardship. The best example of a tax that possesses this characteristic is the individual income tax. Because a percentage of income is withheld from each individual's paycheck at the time of receipt, the bulk of the individual's total tax liability is automatically paid from current cash flow. The property tax, on the other hand, may not possess this characteristic. If an individual who owns property is unemployed at the time when property taxes become due, he will be liable for payment of the tax regardless of the fact that he may be unable to pay the tax from current cash flow.
A second characteristic that a tax must possess in order to meet the objective outlined for social equity is that the tax burden borne by individuals with common circumstances must be equivalent. Again, the individual income tax is a good example of a tax that possesses this characteristic. Because income is generally regarded as a fairly good measure of circumstance and individuals falling within the same income range are taxed at the same rate, it is relatively safe to assume that individuals with common circumstances have roughly equivalent income tax burdens. The school district property tax is a prime example of a tax which does not possess this characteristic. Because the tax rate levied on a given property depends upon the level of school expenditures and in particular on the total amount of property valuation subject to tax within the district, two parcels of equal value located within separate school districts may have totally different tax burdens. Differences in appraisal techniques may also result in two property parcels of comparable value being subjected to different tax liabilities. The third characteristic that taxes should possess if they are to be considered equitable, is that, all other things being equal and given that an individual can afford to pay a tax, the taxpayer receiving more services should be taxed at a higher level. "benefits of taxation." Economists refer to this tenet of taxation as the Some caution must be used in evaluating taxes according to
this characteristic because of the difficulty of identifying specific benefits that are derived from the levy of a given tax. Particularly in the case of taxes which are designed to raise large amounts of general revenue, it is difficult to determine the relationship between costs to the taxpayer and benefits received. The fuel tax is a good example of a tax that possesses this characteristic. Receipts from fuel taxes are generally used for road maintenance and construction. We can probably assume that individuals who travel a greater number of miles will ordinarily demand more road construction and maintenance services. Because the fuel tax is levied on gallons of gasoline sold, these same individuals will likely pay greater fuel taxes as well, as the number of gallons purchased increases. Conversely, the individual income tax does not possess this characteristic. Ordinarily, individuals with lower incomes require more government services (income assistance, indigent health care, etc.). These individuals will not be required to pay greater income taxes to finance these services, because the income tax is designed so that individuals with lower incomes will pay lower income taxes.
Ease of Administration Basically, only one characteristic must be present if a tax is to satisfy the objective outlined for ease of administration relatively easy to determine. The sales tax is a good example of a tax which possesses this characteristic. The sales tax is a direct tax on the gross selling price of a good. Because this price is fixed prior to sale, no discretion is permitted in determining the value of the tax base. The property tax, on the other hand, is levied on the assessed valuation of a If the property has not been sold recently, no direct measure of the current market value of the property will be readily available and therefore, the exact value of the tax base will be somewhat difficult to determine. Consistency with State Goals The final criteria established for evaluating taxes is consistency with state goals. If a tax is to meet the objective outlined for this criteria, two characteristics will ideally be present. First, a substantial portion of the total tax levy will be paid by the property which is based on the property's current market value.
- the value of the tax base should be
A good example of a tax which possesses this characteristic is the sales tax on hotels. Because hotels are normally frequented by the residents of other states and these individuals will pay the price of the accommodations, a substantial portion of the sales tax on hotels will be paid by non-residents. The individual income tax is a good example of a tax which does not possess this characteristic. Non-residents are taxed on income only to the extent that this income is derived from sources within the state.
residents of other states. In addition to this characteristic, a tax should not inhibit the growth of business or discourage new businesses from locating in the state, if it is to be consistent with state goals. A good example of a tax which possesses this characteristic is the estate tax. This tax is levied on the personal possessions of deceased individuals and therefore, has no direct effect on the growth of business. Other taxes such as the unemployment insurance tax, are paid directly from the proceeds of businesses subject to the tax and, therefore, may serve to inhibit the growth of the business if they become excessive.
Conclusion Although it is unlikely that any given tax will satisfy all of the above criteria, it is nevertheless helpful to evaluate tax alternatives in terms of these criteria in order to identify strengths and weaknesses of the options under consideration. In so doing, it may be possible at times to eliminate elements of a tax that are contrary to the objectives of the taxpayer. By levying the fuel tax on gross receipts from the sales of fuel instead of levying the tax on gallons sold, for example, it may be possible to assure that revenues from the fuel tax will expand over time as prices of government services continue to increase. It is also possible that a tax which satisfies a given set of criteria may be more suitable for certain purposes, and evaluating all tax alternatives in terms of a standard set of criteria will provide some basis for selecting the best tax for the purposes at hand. For example, if a tax is needed for the primary purpose of raising large amounts of general revenues, it might be a good idea to select a tax which is affordable to the individual taxpayer from current cash flow, because the larger the revenue requirements, the more likely it becomes that payment of the tax will represent a hardship to the individual. Thus, the income tax might be the best tax to levy when large amounts of general revenues are required. In the case of a general tax reform, evaluating the alternatives under consideration in terms of a standard set of criteria, will serve as a basis for developing a mix of taxes that satisfies all of the criteria to the greatest degree possible in order to produce a tax structure that more fully meets the demands of the taxpayer. In order to evaluate each alternative in terms of these criteria it is necessary to have accurate information on the impacts that the alternative will have on tax revenues and individual tax burdens. It is also helpful to consider the administrative aspects of the alternative and its potential impact on state growth and development. The following sections outline the techniques that were used to generate this information for each of the major tax reform alternatives considered by the Arizona Legislature during the Special Session. The sections are divided by property tax issues, income tax issues, and sales tax issues. Each section contains a summary of the current system of taxation, a description of the techniques used to simulate the impacts of proposed tax alternatives and an example of the types of data that were generated using these simulation techniques.
2.
PROPERTY TAX I S S U E S
A i n other s t a t e s the property tax in Arizona i s levied on the s
taxable assessed valuation of properties within the s t a t e .
Perhaps d i f -
fering from other s t a t e s , Arizona has a c l e a r separation between the concepts of full cash value and assessed valuation. The full cash value of property i s the market value of the property as appraised by the County Assessor or the De~artmentof Revenue. Assessed valuation i s equal t o a
percentage of the f u l l cash value, and represents t h a t portion of the value subject t o taxation. The property tax base, or the assessed valuation system i n Arizona i s unique in t h a t i t i s defined by several classes of property. For any
parcel of property, the percent of f u l l cash value that i s subject t o taxation will depend on the use t o which the property i s p u t and the subsequent c l a s s i f i c a t i o n of t h a t use. Each c l a s s has a separate assess-
ment r a t i o assigned t h a t defines the percentage o f f u l l cash value that i s subject t o taxation. Classification allows the s t a t e t o t r e a t the several types of property d i f f e r e n t l y f o r taxation, thereby influencing the proportion of taxes paid by each c l a s s of property. To date, only eight s t a t e s , including Eighteen other
Arizona, have adopted comprehensive c l a s s i f i e d tax systems. s t a t e s have implemented p a r t i a l c l a s s i f i c a t i o n schemes.
In Arizona, there are nine c l a s s i f i c a t i o n s o f property f o r taxation as shown below:
S
PROPERTY CLASSIFICATIONS FOR TAXATION
I I I I I
Class
Assessment Ratio
Property Types f l ight property; producing mines and timber telephone and telegraph company property gas, water, and e l e c t r i c company property; pipeline company property commercial and industrial property agricultural property residential property; non-profit handicapped or elderly care faci 1it i e s rental residential property private c a r companies, railroads h i s t o r i c property producing 011 and gas company property
I process two issues continued t o surface - the level of appraisal the I c l a s s i f i c a t i o n of property. I a. 1 . Historically, the appraisal of property was a very a r b i t r a r y process I and dependent upon the discretion of the local appraiser. Prior t o s t a t e hood in Arizona, the county s h e r i f f was authorized as the tax assessor I and collector. Under the early system, each property owner was responI s i b l e f o r f i l i n g an a f f i d a v i t of his property with the county sheriff, The resultant l i s t of propert:ivaluesv~ithin the county comprised the I property tax base. In 1912, the year of statehood, the State Tax Commission was formed I t o supervise the collection of property taxes. All similar properties were I
T h i s system i s the r e s u l t of an e v o l u t i o n p r o c e s s t h a t was undertaken in Arizona froel the early days of statehood. Throughout t h i s developnent
and
t o be valued equally a t f u l l cash value.
The Tax Commission was authorized
t o appraise a i 1 producing nines, railroads, telegraph and telephone companies, express companies and private car companies in the s t a t e . Appraisal of a l l other properties was charged t o the counties. The f i r s t Tax Commission discovered t h a t property appraisals varied widely across the s t a t e , ranging from 25% t o 70% of f u l l cash value. In
an attempt t o equalize appraisals, the Commission ordered t h a t a l l property be assessed equally a t 50% of i t s f u l l cash value. Altliough an e f f o r t was made t o comply with t h i s order, which resulted in a substantial increase i n assessed valuation, not a l l counties conformed f u l l y . To give
the State Tax Commission the power t o supervise the county boards of equalization, an amendment t o the Constitution was presented t o the voters in the 1912 election. The amendment passed, and i n 1913 the State Tax Com-
mission was granted broader powers. B 1913, statutory classes existed f o r express companies, private car y companies, banks and general property. were treated d i f f e r e n t l y . Properties in each of t h e s e c l a s s e s
Express companies were taxed on gross proceeds Private car companies were also s u b j e c t t o a Banks were taxed on capital
in l i e u of ad valorem taxes.
separate tax in l i e u of the property tax.
stock, and general properties were assessed and taxed under general law. Each taxing mechanism and c l a s s i f i c a t i o n was selected f o r purposes of simplicity and convenience. In 1933, the Intangible Property Tax Act created seven classes of intangible property, each bearing a d i f f e r e n t tax r a t e . This law repre-
sented the f i r s t attempt to use the c l a s s i f i c a t i o n system t o modify the burden of taxes among taxpayers. In the following year, however, the
a c t was struck down by the State Supreme Court on the grounds t h a t the c l a s s i f i c a t i o n system that was established was a r b i t r a r y and t h a t there
was no meclianism for taxpayers' appeals. It is interesting to note however, that although the act was declared unconstitutional, the court did rule that a classification system was constitutional as were different tax rates for different classes. In 1950, the Legislature distinguished between manufactories and other types of property, and as a result modified the tax burden of businesses. The 1950 act provided that machinery used in the operation and maintenance of any manufactory could be assessed for tax purposes at 50% of its book value. Excluded from the definition of a manufactory were businesses engaged in the following activities:
I I I I
-
-
mining, smelting, quarrying, etc. furnishing utilities to consumers telephone or telegraph service pipeline operations publication job printing or advertising slaughtering contracting
Thus, while the State Tax Commission was trying to establish uniformity of assessments, the state was providing for differences.in the treatment of properties by altering the assessment ratios applicable to different types of property. Differences in assessments persisted, thereby altering the relative property tax burden, both between and within counties, and between classes of property. In 1959, the Southern Pacific Railroad challenged the property tax assessment system in court on the grounds that the railroads were being assessed higher than other properties. The Arizona Supreme Court ruled that the system was discriminatory and must be prohibited in the future since it was not provided for in statute. The legislature, concerned by the decision, ordered a reappraisal of all properties within the state in preparation for reform. The revaluation was to be conducted by the newly established Division of Appraisal and Assessment Standards which .. became the Department of Property Valuation in 1967.
I I I
I
I I
In 1968, a f t e r the revaluation was completed, the l e g i s l a t u r e began research t o develop a c l a s s i f i c a t i o n system which would e s s e n t i a l l y preserve the existing tax burden. The property tax r o l l s were divided into four
A separate assess-
classes, each c l a s s t o be appraised a t f u l l cash value.
ment r a t i o was then applied t o each c l a s s i f i c a t i o n to determine assessed valuation. The four c l a s s i f i c a t i o n s of property established in 1967 and
t h e i r assessment r a t i o s a r e as follows: Class 1: Assessment r a t i o - 6 0 % Flight property, private car companies, rai 1 road properties used in the continuous operation o f the l i n e , producing mines, and standing timber Assessment r a t i o - 40% Telephone and telegraph companies, gas water and ' e l e c t r i c u t i l i t i e s and pipelines Assessment r a t i o 25% Commercial or industrial property other than t h a t included in Class 1 , 2 o r 4, including residential rental property 18% Assessment r a t i o Agricultural property and a l l other property not included i n Class 1 , 2 or 3
Class 2 :
Class 3:
-
Class 4:
This c l a s i f i c a t i o n system was protested by the railroads t o the Arizona Supreme Court in 1969. c l a s s i f i c a t i o n system. Legislation in 1968 required t h a t the county assessors update property valuations annually. personnel and budgets. This was found t o be very expensive in terms of The Director of the Department of Property Valuation The Supreme Court, however, upheld the
wanted t o update one-third of a l l properties each year, thus revaluing each piece of property every three years.
An Attorney General's opinion
concluded t h a t such a system would be permissable. uation was challenged in court, however, on
The three-year reval-
the grounds t h a t i s was unfair
t o those taxpayers revalued i n the f i r s t and second years, and was found t o be unconstitutional
i n 1975.
.
The case, however, was appealed and overturned
Prior t o the time the case was overturned however, the Department of
Property Valuation made a major e f f o r t t o i n s t i t u t e annual reappraisals of property. To do t h i s , the department adopted a sales comparison multi-
1inear regression model t o estimate residential' property values.
The f i r s t use of t h i s technique was f o r the tax year 1973.
The
new system produced values t h a t were approximately 25 percent higher than those derived under the old system. To compensate the homeowner f o r the
sudden increase in values, the l e g i s l a t u r e began the homeowner r e b a t e -tax
program.
I I I I
Since 1973 the l e g i s l a t u r e has continued t o a l t e r the original four c l a s s system. Presently i n Arizona there a r e nine formal classes of
property d i f f e r e n t i a t e d i n t h e i r tax treatment by t h e i r usage. The Arizona property tax system has always had an additional c l a s s of property; t h a t i s , property exempt from taxation. The Constitution
e i t h e r provides or allows the l e g i s l a t i r e t o grant property tax exemptions for the following categories: 1) Federal, s t a t e , county and municipal property; 2 ) Property of c h a r i t a b l e , education and r e l i g i o u s organizat i o n s which i s not held or used for p r o f i t ; 3 ) Household goods owned by the user and used s o l e l y for noncommercial purposes; . 4) Inventories; 5 ) Property belonging t o c e r t a i n widows and widowers*; 6 ) Property belonging t o c e r t a i n honorably discharged members of t h e armed f o r c e s ; 7 ) Property belonging t o c e r t a i n disabled individuals*.
*The exemptions f o r widowers and disabled persons i n 1 9 8 0 a s a r e s u l t of the s p e c i a l session on tax reform and school finance.
I I I I I I I I I
b.
Description of the Current Property Tax System
After the appraisal of a l l property and the adoption of budgets by j u r i s d i c t i o n s , a l l taxing jurisdictions t h a t have the power t o levy a tax establish t h e i r tax rates. The r a t e s e t t i n g procedure f o r each jurisdiction i s e s s e n t i a l l y the same. The tax r a t e i s expressed as do1 l a r s per $100 of assessed valuation.
The tax r a t e when applied t o assessed valuation should produce adequate
funds t o meet the revenue requirements of the taxing jurisdiction. revenue requirements a r e known from the proposed budget.
The
Revenues from
any source other than the property tax a r e subtracted from the revenue requirements t o determine the necessary property tax levy. assessed valuation per jurisdiction i s a l s o known. The amount of
Because the tax r a t e
i s established as d o l l a r s per-one hundred dollarc of assessed valuation, the assessed valuation i s divided by 100. This number i s then divided
into the net revenue requirements of the jurisdiction t o determine the tax r a t e . In summary, the property tax r a t e i s s e t i n the following manner: Total Revenue Requirements - Funds Property - Other Than Tax Levy Tax Necessary Property Necessary Property Tax Levy Assessed Valuation f' 100
A parcel of property may f a l l within several p o l i t i c a l jurisdictions
t h a t have the power t o levy a property tax.
For example, a property owner
i s l i a b l e f o r taxes levied by the s t a t e , the county, a c i t y , a school d i s t r i c t , a community college d i s t r i c t , and perhaps, one or more special districts. There are approximately 15 types of special d i s t r i c t s in
Arizona, formed f o r the purpose of supplying a locally needed f a c i l i t y or service. Types of special d i s t r i c t s include:
Anti noxious (weed) d i s t r i c t s Electrical districts Fire districts Flood c o n t r o l d i s t r i c t s Hospital d i s t r i c t s Improvement d i s t r i c t s Irrigation districts I r r i g a t i o n and w a t e r d i s t r i c t s Library di stri c t s Road d i s t r i c t s Sanitation di stri c t s S t r e e t l i g h t i n g and improvement d i s t r i c t s Si dewal k d i s t r i c t s Water di stri cts Water c o n s e r v a t i o n d i s t r i c t s To determine t h e p r o p e r t y t a x 1 i a b i l i t y o f a p a r t i c u l a r parcel s u b j e c t t o d i f f e r e n t 'taxing j u r i s d i c t i o n s , a t a x a r e a code i s a s s i g n e d . The t a x a r e a
code r e p r e s e n t s a s p e c i f i c geographic boundary i n which s e v e r a l t a x j u r i s d i c t i o n s exist. The t a x a r e a code i s used t o i d e n t i f y t h e t a x r a t e s appl i c a b l e t o
t h e assessed value o f a property. The t a x r a t e may vary s u b s t a n t i a l l y between t a x i n g a r e a s . In 1978, f o r
example, f o r a l l school d i s t r i c t s comprised o f both an elementary and a high s c h o o l , the high t a x r a t e was $22.05 i n Union No. 62 i n Maricopa County, and t h e low r a t e was $2.825 f o r Morenci Unified D i s t r i c t No. 18 i n Greenlee County. The t a x r a t e i s a f u n c t i o n o f the budgeted needs o f t h e community, and t h e amount and t y p e o f p r o p e r t y i n t h e d i s t r i c t s . Total c o l l e c t i o n s from the p r o p e r t y t a x during 1977-78 amounted t o $778
m i 11 ion.
I I I I I I
The di s t r i b u t i on o f p r o p e r t y t a x col 1ecti ons among t a x i n g d i s tri c t s
I
i s shown below:
Amoun t State* Counties Cities School D i s t r i c t s Communi t y Col 1e g e s Special Districts Unorgan i zed T e r r i t o r y TOTAL
% o f Total
395,961,952 56,457,874 18,830,759 1,775,431 $778,416,825
*The s t a t e r e b a t e d $57.5 mi1 1 ion back t o homeowners during 1977-78.
I
A significant portion of the total tax levied on property owners is never collected or is returned to taxpayers because of the effects of several tax relief programs. The relief programs fall essentially into two categories, property tax relief through the income tax system and the homeowner's rebate program. Property Tax Relief through the Arizona Income Tax has essentially three components: Homeowners Property Tax Deduction - When computing Arizona income tax liability, property taxes paid are a deductible expense from adjusted gross income. Property Tax Credit - for homeowners age 65 or older, with sole income of less than $3,750 or a joint income of less than $5,000, there is a property tax credit that is dependent upon the level of income. The maximum credit as set forth in statute is $225. Renters Credit - each renter may receive an income tax credit of ten percent of rent paid, or $75, whichever is less. The property tax credit and the renters credit have been inflation indexed since 1978. Currently the maximum amounts of credit are $276 and $92 respectively. The homeowners property tax reduction program originated in 1973 when legislation was enacted to relieve homeowners from the effects of significantly increased property valuations caused by the statewide revaluation of residential property under the MLR appraisal system. As the program currently operates, monies are appropriated to the county treasurers to pay a portion of the school district property tax levy which would otherwise be paid by homeowners. The homeowners property tax reduction was originally made possible by revenues received from the Federal Revenue Sharing Program. Total fundsappropriated for this purpose are shown below for each year in which the program has been in effect.
Property Tax Reduction Totals
In addition t o these programs the l e g i s l a t u r e has attempted t o retard the inflationary increases i n property valuations by using the concept of deflators. In 1978 the l e g i s l a t u r e mandated t h a t a l l valuations be reduced In 1979 the process was repeated w i t h
by dividing valuations by 1.05. a 1.15 deflator.
I t was hoped t h a t these adjustments would reduce property
tax levies because local o f f i c i a l s would be hesitant t o commensurately increase t h e i r tax rates. A though i t cannot be substantiated, i t i s widely 1
believed t h a t the program was a success. c. Description of t h e Property Tax ~ o d e l s Early in the planning stages f o r the special session i t was recognized
I I I I I
t h a t the major e f f o r t of the session would be directed toward the property tax system in Arizona. Leadership and s t a f f both f e l t t h a t major e f f o r t s
should be undertaken t o develop a computerized property tax data base and simulator. The planning f o r the data base and the simulator revolved around three basic a c t i v i t i e s ; identifying the simulations and display requirements ; , identifying, collecting, and editing the data required for the display, and sirnulati on
;
I I I I
designing the simulators.
-v
This section of the report w i 11 describe these a c t i v i t i e s .
1.
Identifying the simulation and display requirements
This a c t i v i t y was undertaken very early in the process and consisted of --es a thorough analysis by s t a f f and l e g i s l a t o r s of p a s s i b l e chaaA, made in the property tax system. t h a t could b
The process consisted of analysing the components of the property tax system and possible changes t h a t could be made in each. The process included
l i t e r a t u r e searches, review of previous l e g i s l a t i v e i n i t i a t i v e s , discussions with i n t e r e s t groups and lobbyists and ultimately w i t h a s e r i e s of public hearings held throughout the s t a t e . From these sources of input,a broad range of alternatives were analysed. I t was concluded t h a t the session would address the property tax in one o r more of the following areas and the simulator designed should have the capacity t o address any of them.
1. 2. 3. 4. 5. 6. 7.
The areas i d e n t i f i e d were:
taxlevies tax r a t e s f u l l cash value levels class composition assessment r a t i o s assessed valuations education finance system
Some examples of the alternatives and simulations t h a t were hoped t o be analysed in each of these areas included:
1. Tax levies:
levy 1imitations; changes in levy composition ( i . e . , transference of funding responsib~ i t i e s j I projection of 1evy requirements. r a t e ceilings f o r jurisdictions o r taxpayers; s p l i t t i n g r a t e s by c l a s s ; adjusting rates by sales r a t i o and analysis. adjusting by sales r a t i o reports; controlling i ncreases ; reducing re1 ation t o market value; projecting future increases . restructuring of classes. changing r a t i o 1evel s ; reducing number of r a t i o ; weighing r a t i o s by sales r a t i o s . adjusting by sales r a t i o s ; controlling increases; reducing re1 ation t o f u l l cash value through increased exemptions or homestead exemptions ; projecting valuation 1evel s
2.
Tax r a t e s :
3.
Full cash values:
4.
5.
6.
Class composition: Assessment r a t i o :
Assessed valuations:
.
7.
Education finance system:
changing s t a t e aid distribution formula; equalizing rates; changing budget constraints ; projecti ng requi rements f o r tax levies and s t a t e aid.
These alternatives, which were primarily quantitatively oriented, were supplemented by nonquantitative alternatives such as "truth in taxation" laws, reversing the function of rates determining levies, mandating stronger equity measures and adjustments in the assessing process, and specifying specific valuation formulas. Once t h i s range of options was established, identifying the requirements for display of the alternatives was considered.
I t was determined t h a t the
results of the simulations had t o be presented in essentially two manners:
1) by jurisdiction and by type of jurisdiction, and
2 ) by taxpayer i n specific
locations.
I t was further determined t h a t each of these displays should be
cross tabbed by county and by class of taxpayer.
2.
Identifying, Collecting and Editing Data
After completing the process of identifying the simulator and display requirements, staff began to identify a n d col l e c t the required data. In order t o build the simulator t o meet the contingencies outlined, the following data was determined t o be necessary for the major property tax model. Jurisdictional abstracts (secured roll , secured and unsecured roll )information needed - identifiers ; jurisdiction name, authority number - v l a i n y parcel counts, full cash value, au to b exemption amounts, assessed valuations, adjusted assessed valuations
2.
I I I I I I I I I
Area code abstracts (available for secured roll only) information needed - identifiers: area code number, county of 1 ocati on, jurisdictions composing area code (authority number and name) - valuations by legal class parcel counts, full cash value, exemption amounts, assessed valuations, adjusted assessed valuations Jurisdiction tax rates - information needed jurisdiction name, authority number - t a x rates
3.
-
identifiers
4.
Homeowner Reduction Amounts & Rates information needed - i d e n t i f i e r s j u r i s d i c t i o n name, a u t h o r i t y number - reduction r a t e s and d o l l a r amounts
5.
Bond p r i n c i p l e , i n t e r e s t & redemption charges information needed - i d e n t i f i e r s j u r i s d i c t i o n name, a u t h o r i t y number - land payment amounts - t o t a l payments per year and sources of revenue used f o r repayment - bond tax r a t e s - i f a v a i l a b l e Valuations used i n levying information needed - i d e n t i f i e r s j u r i s d i c t i o n name, a u t h o r i t y number - valuation amounts Sales Ratio Reports information needed - i d e n t i f i e r s j u r i s d i c t i o n name, a u t h o r i t y number - s a l e s r a t i o reports by legal c l a s s Class f i v e valuation a b s t r a c t (secured r o l l ) information needed - i d e n t i f i e r s j u r i s d i c t i o n name, a u t h o r i t y number divided i n t o $100 increments w i t h amount c l a s s valuations of valuation t o t a l f a l l s between t h e brackets of valuation
.
7.
8.
-
-
9.
Other Information information needed
-
-
teacher retirement and OASI costs of counties superior c o n s t r a i n t s of r a t i o s
After i d e n t i f i c a t i o n of data needs, s t a f f i d e n t i f i e d potential data sources and began t h e c o l l e c t i o n process. I t was determined e a r l y on t h a t Primary among
c e r t a i n components of the data requi rements were unavai 1abl e. these elements were t h e s a l e s r a t i o r e p o r t s .
Information regarding s a l e s r a t i o a n a l y s i s was not s u f f i c i e n t l y re1 iabl e o r precise t o be u t i l i z e d as t h e basis f o r adjustment of tax r a t e s , f u l l cash values , assessment r a t i o s o r assessed val uations. Of the information t h a t was avai lab1 e , i t was determined t h a t i t could and would be obtained from the following areas:
DATA -
SOURCE
METHOD
- Abstracts -
( j u r i s d i c t i o n a l legal c l a s s and use code)
DOR
Computer Transfer
Jurisdictional tax r a t e s Class f i v e valuation abstract rates Legis. Staff Jurisdictions
U/A
- Homeowner reduction
Sales r a t i o reports
Bond Principle and i n t e r e s t
Survey
Other budget information
County Budgets
Review and fol 1ow-up
Concurrent w i t h the planning of the special session, the S t a t e Department of Education undertook the development of a school finance simulator. This simulator, to be driven by student counts, budget information and assessed valuation was evaluated by l e g i s l a t i v e s t a f f in the summer of 1978. From t h i s evaluation, i t was determined t h a t the two models, the education simulator a n d the property t a x simulator, could be unified f o r analysis purposes. The education simulator represents the only major component of
the electronic data processing simulator t h a t was not constructed in-houseAn out1 ine of the model i s included in Appendix I.
Once the data was collected, edited and niountnzd i n an electronic form, construction of the models began. A t t h i s point in time, the a1 ternatives
examined i n the early stages of the research e f f o r t were reviewed and three basic pol icy decisions were made by Leadership. The f i r s t decision i s t h a t there would be no restructuring of the compos i t i o n of the property tax c l a s s i f i c a t i o n s . This meant f o r example, no
consideration would be given to removing certain general commerci a1 properties
( 1 i ke warehouses) from the Class 3 c l a s s i f i c a t i o n f o r general commerci a1 ,
In
making t h i s decision i t became unnecessary t o manipulate the jurisdiction use code abstracts. ated. The information remained available b u t was not mani~ul
The second decision was t o not pursue the granting of general homestead exemptions. A in the case of the f i r s t decision, t h i s made i t unnecessary s
to devote s i g n i f i c a n t resources t o the programming of a homestead model, though the cl ass f i v e abstract of incremental val ues remained avai 1able. The t h i r d decision was t o not pursue any sortof adjustments based on sales r a t i o analysis since r e l i a b l e data was not available. After these decisions were made, s t a f f analysed the remaining requirements and eventually decided upon two basic processing models: and the area code model. The summary model
The models were o r i g i n a l l y designed and b u i l t t o
display the data that had been collected, a1 though eventually they were transformed into simulators. The summary model became the basic model in which data was t o be displayed and manipulated. I t s primary focus was jurisdictional i n nature. I t illustrated
taxpayer c l a s s tax payments and average payments, and levies by the various types o f jurisdictions. The primary data flowing into the mode1 were the
abstracts (by 1egal cl a s s ) , tax r a t e s , homeowner reduction r a t e s , 1and payments, and teacher retirement information. The display format adopted f o r the summary run i s depicted in Exhibit 1. A can be seen, t h i s format i s a summarization of a l l available information by s jurisdiction type and by legal c l a s s within a county. The upper display shows f o r Maricopa County in 1979.
A.
B.
Class i d e n t i f i e r The net f u l l cash value of each class. This i s a calculated amount derived through the f o l l owing formula:
FCV- (EAV S A d j S AR) = NFCV where FCV = f u l l cash value EAV = exemption (widows, veterans, re1 i gi ous , . pub1 i c building, e t c ) assessed value A J = adjustment factors f o r assessed valuation D
(1979=1.15)
AR = the assessment ratio NFCV= net taxable full cash value
C.
The adjusted assessed valuation of each class. This i s the net taxable assessed valuation reduced by the adjustment f a c t o r (1978=1.05; 1979=1.15; 1980=1.0) The gross tax dollars of each c l a s s . This i s a calculated amount derived by multiplying the adjusted assessed valuation of each c l a s s in each jurisdiction by the respective tax r a t e of the jurisdiction and summing the products. The percentage t h a t gross tax d o l l a r s are of net f u l l cash value of each class. This i s calculated in the same manner as gross tax dollars b u t each gross tax r a t e i s reduced by the bond tax r a t e (see below).
D.
E.
F. The operating tax dollars of each c l a s s .
G. The percentage t h a t operating do1 l a r s are of net f u l l cash value of
each class. The "bond dollars" or nonoperating d o l l a r s paid by each c l a s s . Originally t h i s was determined t o include only bond d o l l a r s , eventually a l l special d i s t r i c t levies were included under t h i s concept. Calculated in the same manner as gross tax dollars and operating do1 l a r s . The bond tax rates ( i f not s p e c i f i c a l l y levied f o r by the j u r i s d i c t i o n ) were calculated by dividing bond i n t e r e s t and redemption amounts (not a1 1ocated from earmarked revenue sources) by the valuations u t i l i z e d by the jurisdiction t o s e t i t s tax r a t e .
I.
m .
The percentage t h a t "bond" dollars are of net f u l l cash value of each c l a s s . The lower half of Exhibit 1 shows much the same information except i t was
s t r a t i f i e d by jurisdictional type.
A t minimum two runs were required f o r each of the actual tax years
(1978, 1979) f o r which data was collected.
T h e f i r s t of these runs was made
without regard t o the homeowner property tax reduction program and the second run was made reducing the payments of c l a s s 5 by the provisions of t h i s program. Exhibits 2 and 3 are examples of the display from the summary r u n which offered more d e t a i l of the information presented in Exhibit 1. Exhibit 2 depicts the payments to the various jurisdictional types by class of property within a county and exhibit 3 depicts the payments received from the various classes of property by jurisdictional types. In addition t o t h i s basic output from the summary depiction model, various detailed s e t s of output could be obtained. on individual jurisdictional 1eve1 s . Primary among these were information
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The area code model became the basic model f o r depiction of tax burden by specific taxpayer. unique tax r a t e s . jurisdictions. Exhibit 4 shows the basic index f i l e used in the area code run. It Area codes represent geographic l ocations containing
Unique tax rates a r e the r e s u l t of overlapping taxing
contains the county number (07 i s Maricopa), area code number, the authority numbers and names of the jurisdictions composing each area code, and the tax rates associated with each jurisdiction in the area code. This index f i l e when applied t o the area code legal c l a s s abstract would produce the r e s u l t s contained in Exhibit 5 or Exhibit 6 . i l l u s t r a t e tax burden by c l a s s . These exhibits
Exhibit 5 presents the information in abstract
form showing legal c l a s s , parcel count, net taxable f u l l cash value, and tax d o l l a r and percentage of f u l l cash value amounts by the three basic categories examined. Exhibit 6 shows essentially the same information in more
compact form and county number, area code, primary school d i s t r i c t , legal class
(8 being class 5 with rebate) parcel count,
gross tax dollars w i t h percentage
of net f u l l cash value, and operating tax dollars w i t h percentage of net f u l l cash value. Exhibit 7 i s a county-wide frequency distribution based on parcel count.
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(2) Expenditure Control Provision: (a) Existing Spending defined: (i) 1977-78 = Basic State Aid + Levy + Other Rev. (ii) 1980-81 = 1980-81 BCL + 1977-78 Authorized Spending in excess of t h e 1977-78 BCL.
(b) Where Existing Spending 4 W*(WADM)(SSL) (i) Option A: Allowable Spending can be established a t any level between BCL and W*(WADM)(SSL) (ii) Option B Allowable Spending = Existing Spending : (c) Where Existing Spending > W*(WADM)(SSL) (i) Option A: Allowable Spending = Existing Spending (ii) Option B: Allowable Spending can be established a t any level between W*(WADM)(SSL) and Existing Spending level.
(3). Levy is tied t o Expenditure Control Provision: Levy = (Allowable Spending established by selected option) - (Basic State Aid + Other Revenue computed for proposed and projected years).
d. MethodIV
(1) State Aid:
(a) Compute a Maximum Support Level t h a t is some specified percent in excess of W*(WADM)(SSL)
(b) If the district's BCL > Maximum Support Level, then Allowable Support Level = Maximum Support Level (c) If the district BCL( Maximum Support Level, then Allowable Support Level = BCL + some % of difference between Maximum Support Level and BCL (2) Expenditure Control Provision: (a) Existing Spending defined: (i) 1977-78 = Basic State Aid + Levy + Other Rev. (ii) 1980-8 1 = 1980-81 BCL + 1977-78 Authorized Spending in excess of 1977-78 BCL. (b) For those districts whose Exsiting Spending 7 Maximum Support Level, then they may spend a t Allowable Support Level. (c) For those districts whose Existing Spending ( Maximum Support level, then: (i) Option A: Allowable Spending = Existing Spending (ii) Option B: Allowable Spending may not exceed Maximum Support Level. (3) Levy is tied t o Expenditure Control Provison: Levy = (Allowable Spending established by selected option) (Basic State Aid + Other Revenue computed for proposed and projected years).
-
3.
Other special options for establishing t h e Support Level have also been built into the simulator for added flexibility.
a.
Negative Aid (Recapture) this allows State Aid t o be negative and these negative monies would flow t o t h e s t a t e t o be distributed t o those d i s t r i c t s b i t h positive aid needs. Impact Aid Deduction this option will allow a district's computed State Aid t o be reduced by some percent of its Federal 874 Impact Aid. Minimum this option guarantees a minimum specified amount of State Aid per student regardless of t h e district's formula entitlement. Hold Harmless this option authorizes a district t o receive all or any portion of its entitlement t o State Aid under t h e current aid formula even if the proposed State Aid formula would allow for less.
-
b.
-
c.
d.
-
-
4 .
The remaining revenue sources for the proposed and projected years a r e determined in the following way. a. Other State Aid (1) 1977-78 Actual from Master Fund Report. (2) 1977-78 Proposed = (Factor) (1977-78 Actual), the factor is a parameter input common t o all elementary districts with a separ a t e but common one for high school.
(3)
1980-81 Project = (Factor) (1977-78 Actual), the factor is a parameter input common t o all elementary districts with a separate but common one for high school.
b.
Federal Aid (1) 1977-78 Actual for Master Fund Report. (2) 1977-78 Proposed = (Factor) (1977-78 Actual), the factor is a parameter input common t o all elementary districts with a separ a t e but common one for high school.
(3) 1980-81 Projected = (Factor) (1977-78 Actual), the factor is a parameter input common t o all elementary districts with a separate but common one for high school.
c.
Other Revenue (1) 1977-78 Actual from Master Fund Report. (2) 1977-78 Proposed is same a s 1977-78 Actual. (3) 1980-81 Projected = (Factor) (1977-78 Actual), the factor is a parameter input common t o all elementary districts with a separate but common one for high school.
5.
Pupil transportation (Fund 004) Basic State Aid Equation i s : District State Aid = Gross State Transportation Support - QTR ( A . V . ) Uhere: ( 1 ) Gross s t a t e transportation support i s a d i s t r i c t specific s t a t e supported expenditure level.
(2)
a.
QTR i s the Qua1 i fyi ng Tax Rate t h a t establ i shes the D i s t r i c t ' s effort toward the support level .
A.V. i s the D i s t r i c t ' s Assessed Valuation
(3)
b.
Expenditure Control Provision: (1 ) Compute existing expenditures ( a ) 77-78 proposed = 77-78 (ACT) Basic State Aid + 77-78 (ACT) Fed. Aid + 77-78 (ACT) Levy + 77-78 (ACT) Other Rev.
(b)
I I I I I I I 1 I I I I I I
80-81 Projected = District Specific Factor X 77-78 Proposed
(2)
Define a1 lowabl e spending level (a) 77-78 Proposed = 77-78 Gross State Transportation Support (b) 80-81 Projected = 80-81 Gross State Transportation Support
(3)
Establ ish allowable expenditures for levy computation ; selection i s option: ( a ) Option 1 - I f existing expenditures i s less than a1 lowable spending, then use existing expenditures
(b)
Option 2 - Existing expenditures i s greater than a1 1 owabl e, then use existi ng expenditures
( c ) Option 3 - Existing expenditures i s less than allowable spending, then use allowable spending X factor
(d)
Option 4 - Existing expenditures i s greater than a1 lowable spending, then use allowable spending X factor
Q
c.
d.
Levy i s tied t o expenditure control provision levy = allowable expenditure - (basic s t a t e aid + federal aid + other revenue) Cther special options
(1 )
Negative aid (.recapture) Impact aid deduction
(2)
6.
C a p i t a l o u t l a y (Fund